The following correction was printed in the Guardian's Corrections and clarifications column, Saturday March 17 2007

In the comment article below it was stated that none of the contributors to a Guardian supplement, Promised Lands, which appeared with the paper earlier in the week, had been aware it was paid for by sponsors. In fact only one of the 10 contributors says he was unaware it was sponsored by Housing Market Renewal Partnerships. The comment article also claimed that "some were given to understand they were writing for the Observer". The commissioning editor was an Observer journalist and this may have led to a misunderstanding.

Sensitive readers may avert their eyes, for this column concerns this newspaper and its relations with the Blair government and, dare I say it, money. On Wednesday they may have noticed a special section called Promised Lands. The Observer writer Will Hutton gazed from its masthead, and the lead story was by the distinguished urbanologist Tony Travers.

Other big names were promised inside, including the housing minister, Yvette Cooper, though readers were saved from her famous prose style by a sweetheart interview.

The section ominously carried no advertising, but was not headed "advertising supplement". Yet it was paid for by the government's Housing Market Renewal Partnerships - which agreed the synopsis - to boost the controversial Pathfinder housing policy. In return for a large sum of money, the agency was offered pre-sight of the copy to "correct inaccuracies". In effect, it secured sympathetic coverage. None of the writers (nor the Guardian's readers) was told of this, or that their fees were being paid, in effect, by the Blair government. Some were given to understand that they were writing for the Observer.

The supplement was laudatory of the nine Pathfinder housing clearance projects in the Midlands and north. This potential honeypot of £5bn of public money (half an Olympics) was launched in 2003 to "kick-start" the renewal of down-at-heel cities. This admirable ambition was vitiated by the method chosen, to assemble and demolish Victorian inner-city neighbourhoods for sale to private architect/developers. The option of using the money to give repair grants to residents, or confront the horror of clearing postwar housing estates, was not pursued. Developers demand cleared sites, as with the green belt. The Pathfinders' job was to find and clear them.

This was understandably controversial. Such policies were thought defunct at the end of the 70s. It was known that this kind of comprehensive redevelopment instantly blights a neighbourhood. Once the red line is drawn, services vanish, vandalism and crime increase, values collapse, and residents who would once have fought to stay become desperate to leave. Tenants are offered £1,000 to get out, while owners have been receiving, on Rowntree Foundation figures, some £35,000 less than the market value prior to the clearance decision. This technique, known in the 60s as "winkling", was once performed by the likes of Rachman. It is now being performed by the state. Hutton describes it as "regeneration as a holistic intervention". I can see why this passed the inaccuracy test.

I remember the citizens of Moss Side placed in the same miserable bind before their enforced removal to Skelmersdale in the 1970s (later bitterly regretted). Yet many residents, for instance round Welsh Streets in Liverpool and in Burnley and Blackburn, occupy sound Victorian terraces that, in the south, would be restored without argument. They found lawyers, surveyors and lobbyists to oppose Pathfinder compulsory purchase, and have been involved in six cases, some still pending - winning one in Liverpool's Edge Hill. But they lack the funds of a government that has spent £163m on consultants for a policy that the free market in most run-down world historic cities eventually achieves.

A spate of investigative activity followed the launch of Pathfinder in 2003. The BBC's File on Four spoke in 2005 to groups of residents enraged at their prospective eviction. ITV's Tonight With Trevor McDonald showed that a Liverpool house could be more cheaply restored than demolished. The conservation group Save championed the cause of the northern terrace house in an exhibition and campaigning booklet. Jane Kennedy, a Liverpool MP, accused Pathfinder of "social cleansing". None of them appeared in the supplement. Nor did the separate consultants working in Blackburn's Darwen, who were found to have altered "fit" to "unfit" in their surveys a week after the council announced it wanted particular streets for a lucrative Blair academy project. Here Pathfinder was being used as cover for old-fashioned urban slash and burn.

The truth is that the northern property market is "renewing itself" ahead of Pathfinder. Central Liverpool is now experiencing a property boom, and areas such as Welsh Streets, were they to benefit from renovation grants, would achieve market regeneration without clearance. Even hard-to-let tower blocks in central Liverpool are being sold to new residents through private developers with no Pathfinder help. In Kelvin Grove, houses the government wants to demolish are now valued at £145,000. Brian Clancy, of the Institute of Structural Engineers, told Darwen residents (86% of whose houses had been declared "unfit") that their houses were perfectly good and required no more than an average of £5,000 of renovation to be worth £60,000-£80,000 on the market.

Nick Johnson, of the developers Urban Splash, has been a cuckoo in the Pathfinder nest by securing funds to restore rather than demolish a grid of derelict streets at Langworthy in Salford. He regards the popularity of the British urban terrace as rooted in "the incredibly robust houses, in their ability to be transformed and reworked to each generation". He did not feature in the supplement, and he must labour under the handicap of Cooper's requirement that he pay 17.5% VAT on terrace renovation, while clear-and-rebuild is zero-rated. Perhaps he should christen his estate Olympics Street.

The developers boast that the government's £5bn will attract £20bn of private money. But so might a few million spent on restoration grants and publicity. The government is trapped by putting itself in the pocket of developers' interests, backed by the House Builders Federation - which is potent in Downing Street. These interests are in danger of losing both Cooper's gushing consultancy fees and her actual subsidies. Already some 57,000 houses are scheduled for demolition, and there was once talk in Whitehall of a staggering toll of 400,000 Victorian properties coming down.

The plethora of local and national headlines about "the return of the 60s" has bolstered the Treasury worry that Pathfinder's market renewal has already been worked out of a mission. The market waits for no man, and certainly not a government department. Hence the drift of the Guardian supplement, aimed less at its local enemies (none of whom was offered space) than at the Treasury. The section's "editorial" pleaded with the Treasury that it was "crunch time" for Pathfinder in the spring comprehensive spending review. Developers and architects were reported to be desperate that the "revival will stutter if we do not continue to receive the resources we need". The we, of course, is they. Gordon Brown might reasonably argue that, as of yesterday, he has a far more immediate call on his wasted consultancy budget: the Olympics.

Cooper's agents have already been "buying" interviews on local radio stations to exclude local protesters. They have now bought a national newspaper. That taxpayers' money is used to further the interests of private developers against local homeowners is bad enough. That such money should be spent inducing newspapers to dress public relations as journalism in a ministerial spat with the Treasury is close to sleaze.

Another battle will be joined next week in a Guardian supplement paid for by the pro-sprawl government planners of the Commission for Rural Communities. I guarantee that no contribution from the Campaign to Protect Rural England will be included. I wonder why.